Stock Market Comment: Coronavirus and earnings expectations

• Coronavirus is dominating market theme in 2020

• Capital goods, autos and materials stocks seen losing on the outbreak

• Tech stocks with surprising upward revision to earnings estimates

• US actions against Huawei and Apple’s warning may dent optimism towards semiconductor stocks

Coronavirus is a dominating theme on the markets at the beginning of 2020. Outbreak in China threatens to hit the country's economy significantly. However, given how big and important Chinese economy is to the World, the impact is likely to be felt all around the globe. In this week’s commentary we will take a look at S&P 500 industry group sub-indices that have seen the biggest estimate revisions since the coronavirus became the main market theme.

Earnings estimates revised significantly for some industry groups

While first cases that showed symptoms of a novel coronavirus were reported in Wuhan in December 2019, markets did not take much of a note. Markets’ awareness of the disease increased in the week preceding Chinese Lunar New Year as the holiday sees massive intranational migration and therefore risked spreading the virus throughout the country. Taking a look at how 12-month forward earnings estimates have changed for the US industry group sub-indices gives as a glimpse of what sectors would may benefit or lose on the outbreak. However, the results can be surprising in some cases. Top5 leading and lagging industry groups from the S&P 500 index are presented in the table below. 

S&P 500 industry groups with biggest revisions to forward earnings. Source: Bloomberg

Capital goods, autos and material stocks seen losing on coronavirus outbreak

Let's start with industry groups that saw their earnings revised lower. The ranking shows capital goods, autos and materials at the top. This should not come as a surprise as commodity prices plummeted on the virus concerns and China is the biggest vehicle market in the World. When it comes to the capital goods manufacturers, downward revision should not come as a surprise either as China is known as “the factory of the World” and slowdown in the country may easily spill over abroad. However, the left-hand side of the table above - leaders - is looking much less obvious.

Automotive industry group sub-index (red line) plunged along energy stocks (white line) on coronavirus concerns. Materials’ (green line) drop outpaced commodity index drop (purple line, CRB all-commodities index) but equity index managed to recover later on. Source: Bloomberg

Is the outlook for the tech sector really improving amid the coronavirus outbreak?

When it comes to the tech stocks, upward revisions to earnings estimates look odd as numerous US companies are suppliers to Chinese companies. However, upward revisions look good just on the face of it. When we look into details for “Tech Hardware & Equipment” or “Software & Services” groups, we can see that share of companies that saw their earnings revised higher stands at 35% and 22.86%, respectively. Having said that, upward revisions in those two groups can be ascribed to heavyweights, like Microsoft or Apple, as upward revisions for such companies offset downward revisions for others on the index level. However, to say that coronavirus is boosting outlook for tech stocks is a too far drawn conclusion. The reason is much more simple - big companies from those sectors reported earnings during the analyzed period and as reports were upbeat in general, analysts boosted forward estimates.

Semiconductor sector enjoys “broad” upward revisions

“Semiconductors & Semiconductors Equipment” group is the only one to experience “broad” upward revision as almost 70% of the group members had their earnings forecast revised higher over the analyzed period. However, the situation may change following reports that the US may restrict Huawei’s access to chip supply as average revenue exposure to China for the stocks from the group that saw the biggest upward revisions is 30%. Apple’s revenue warning issued today may also encourage analysts to revise their models.

NVIDIA (NVDA.US) booked a strong share price rise on Friday following a release of better-than-expected earnings. Apple’s warning exerted pressure on European semiconductor sector today and the situation is expected to continue during today’s US trading hours. NVIDIA’s stock can be seen as vulnerable as it painted a pin bar pattern (orange circle on the chart) at key price zone on Friday. Source: xStation5

Companies take note of coronavirus outbreak in earnings calls

Coronavirus seems to be a proper justification for downward revisions to earnings estimates of commodity-related, automotive or capital goods stocks. While supply chain disruption should affect tech stocks, upward revisions in this case are due to the fact that big companies from the sector released earnings during the analyzed period and encouraged analysts to revise their forward estimates. As tech stocks enjoyed a strong Q4 earnings season, those estimates are being revised higher. However, caution is advised. FactSet notes that “coronavirus” was mentioned at 38% of earnings calls of S&P 500 companies during the ongoing season. Most said that the virus is likely to have a negative impact while a third said that it is too early to assess impact. It will probably take a month or two for markets to figure out the real impact of the virus. China’s PMIs (February 29) and hard data for February (March 16) will be key for the assessment.

US500 (S&P 500 futures underlying) pulled back after a long weekend as Apple’s revenue warning exerted pressure on global equity markets. However, the index is trying to recover from the drop and eyes a break back above the 127.2% exterior retracement at 3370 pts. Should it manage to do so, a retest of an all-time high at 3393 pts could be on the cards. The next resistance in line can be found at 161.8% exterior retracement of late-January correction (3413 pts). Source: xStation5